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The Benefit of increased competition

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The authors consider a fundamental question regarding the need for incumbents to protect their turf and foreclose entry into their industry. This has been a fundamental issue of industrial organization for more than 50 years (Bain 1956) and numerous studies have demonstrated how barriers to entry are used to protect and increase profits. But are there times when a new entrant can be beneficial for incumbent firms? Using a spatial model, they demonstrate that a well-positioned new entrant can lead to higher (not lower) incumbent profits by creating a level of insulation between incumbents. This happens when the entrant has higher marginal costs (due to a lack of experience producing and delivering the product, but superior positioning by virtue of its flexibility to adopt preferred levels of key attributes. In contrast to incumbents, new entrants do not have entrenched positions). This leads to a win-win situation for all competitors including the entrant. In a simple extension, they demonstrate the source of this finding. The benefits to incumbents obtain from the entrant's ability to insulate the incumbents from each other and not from the entrant's superior positioning.

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